This paper aims to describe two scenarios where the problem of information search interacts with the firm’s investment decisions. Investment decisions cannot be made separately from the need to acquire information.
The scenarios are illustrated with easy-to-follow numerical examples. Vignettes put the numerical examples in their real-world context.
In both scenarios, the firm should choose what might myopically appear as the lower net per value (NPV) alternative to efficiently deal with the information search problem.
Long-term investments are an important topic in the study of both accounting and finance, but it is in the study of accounting where information issues related to long term investments come to the fore. The traditional textbook approach on whether to accept long-term investment opportunities is to use the NPV rule. However, as illustrated in this note, in many important situations where information search is crucial to investment choice, the NPV rule will not lead to efficient investment decisions.
